Economics 101: Common Sense

Recent polls show the economy is the top issue for the 2012 election. With unemployment at roughly 9% and gas prices near historical highs, it’s no shock that voters are looking for a candidate that can help get the U.S. economy back on the path to growth and prosperity.

Throughout history markets have cycled up and down, that’s just the nature of the beast. Unfortunately our current situation is not due to economic cycles, but to greed, crony capitalism and horrendous policies coming out of Capitol Hill from both sides of the aisle.

It is more than clear that the policies being pursued are not working, and history has shown us that they will never work. Call it amnesia, call it arrogance, call it what you will, but this state of mind needs to be corrected in order to see real growth in the private sector. If only politicians and economists in Washington knew just how simple and easy it would be to correct the economy. The course of action is simplistic, but the impact to their back room deals and special interests would be devastating.

In any Capitalist society, consumers drive the economy. That’s not a thought or personal belief — it’s a fact of life. The consumer must have money in their pocket in order to spark demand for a given product or service. An excess supply of goods will not force consumers to buy and a heightened demand with no supply to match doesn’t help anyone either. The $14 Trillion question now is how do we spark demand? Simply put, we need to put more money back in the pockets of Americans … ALL Americans. Lower class, middle class, upper class, high class and no class, give consumers and businesses more money to spend. This will result not only in a push to buy consumer goods but business owners will likely reinvest profits into their inventories and maybe even job hiring. Increased demand from the consumer side will result in a need for increased supply which will be met by businesses hiring more laborers.

A counter-argument often heard is that this is not the case, the Bush stimulus being a prime example which did no good for the economy in the long run (remember, you got a check in the mail). The Bush stimulus can best be equated to a caffeine buzz. For a brief moment in time the economy saw an influx of cash and goods were being bought and all was well. However once the cash was spent and the buzz wore off, there was no more money in the pockets of the consumer to substantiate an increased supply.

Now that the problem has been identified we have to ask, how do we put more money back in Americans’ wallets? Again it is a very simple answer with potentially drastic consequences: we cut taxes across the board and lower government spending substantially.

Spending must be cut first so that less tax revenue will not contribute to increasing the budget deficit. Cap the corporate tax rate down to 25% max (35% is currently one of the highest in the world), allow corporations to repatriate funds without tax liabilities (i.e. GE’s money from Ireland coming back onshore), cut capital gains taxes, lower property taxes, and most importantly drop income tax by 5% per each bracket. This allows for corporations to have more cash to hire individuals and gives individuals more money to spend on goods and services.

As for government spending, funding for certain special interests and programs should be cut or removed altogether, but that is why these groups need to start looking to the private sector for donations instead of holding their hands out to the government. Charities are fantastic and need our help (keyword our, not the government’s), but when tax dollars are forcibly taken and distributed to certain causes, that no longer is charity, it is wealth redistribution. Besides, with all the extra cash put back in to the pockets of US consumers they will have plenty of money to donate to whatever causes they see fit instead of seeing their tax dollars go to hundreds of causes they find silly or insignificant.

Furthermore, I think our politicians in D.C. deserve a pay cut due to the mess they have gotten us in. Each member of the House of Representatives currently earns $174,000 a year, with Speaker, Majority and Minority leaders earning $223,500 a year and $193,400 for Party Leaders (legistorm.com, usgovinfo.about.com). That’s almost $77,000,000 a year just in salaries JUST for the US House of Representatives (excluding health benefits and retirement packages).

These policies that have been outlined are not extreme, radical or out of line; it is pure common sense and deductive reasoning. Everyone makes the economy out to be a fragile machine that could collapse at any moment, which is not the case whatsoever. If we truly want to boost the economy, see unemployment drop and GDP growth reach the 5%+ range, we must allow the consumer to keep more of their hard earned money, spend (or save) it as they see fit, and stop the federal government from frivolously spending your hard earned dollars.

Ben Treece is a 2009 Graduate from the University of Miami (FL), BBA International Finance and Marketing. He is a discretionary money manager with Treece Investment Advisory Corp (http://www.TreeceInvestments.com) and a stockbroker licensed with FINRA, working for Treece Financial Services Corp. The above information is the express opinion of Ben Treece and should not be construed as investment advice or used without outside verification.

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5 Responses to “Economics 101: Common Sense”

Tim Smith

Nice article Ben……I would take out the paragraph about the policicans though…..you are pandering to the masses by throwing their salaries around – $77 miilion for the House makes zero difference in an economy as large as ours. Term limits fixes this – career politicians like Kaptur have hurt our country.

Cutting taxes is critical for any economy to grow. Charities also see increases in contributions when taxes are cut.

Lastly, to grow our economy LONG TERM we also need to do start doing two things right away – chapter 1 of any econ book….

One….invest in our crumbling infrastructure (roads, bridges, airports, railways, etc.). Long overdue and GDP is suffering because of it.

Two….educate, educate and EDUCATE!! People complain about a lack of jobs and opportunities but this is because our educational system (and often poor parenting) have dealt our young people a bad hand to start. Training and hiring better teachers and getting parents more involved will help.

In reading your comment Tim a thought occured to me. How did we become a great nation in the years before education was such a priority and have fallen so far behind the world in the 30 years after education became a major priority? Maybe the answer to that question would solve a lot of the questions about education.

Tim, first and foremost thank you for taking the time to read my thoughts. My grievances towards politicians may have been misplaced, but certainly not unwarranted! Regarding your two points, I found them interesting but I have to kindly disagree. Investing in infrastructure I would consider to be supplying “Shovel Ready Jobs” to the economy, which had little to know economic impact or effect on employment. As for education, before you even commented I had begun penning my next article regarding education and the workforce. Education is great but the pitfall is a generation of Liberal Arts majors. Nobody from my generation wants to become a welder, blacksmith, carpenter, etc. College and graduate programs are great for lawyers and doctors, but their purpose to me is to teach students HOW to learn, not WHAT. Thanks again and keep your eyes open for Generation Why.

Dock…..good point. 30+ years ago we were #1 in education…..now (depending on the study and area being measured) we are in the 15-25 range as a country. That is the issue.

Ben…..agree on politicians….they are warranted, just like to see you keep the “gloves up”.

As for your comment “investing in infrastructure had little to no impact or effect on employment” – I am sorry but you are wrong on this one. I suggest you call UT, MCCC or Owens business school departments if you still believe this. All you have to do is look at your U.S. history to see that a state of the art and cutting edge infrastructure is indeed necessary for economic growth.

Without improvement to our outdated road system, crumbling bridges, overcrowded airports, bogged down shipping and lack of wireless availability in vast parts of our country we will fall behind the rest of the world. Currently, look at India…..same resources as China but an infrastructure that is 30 years away from being “modern”. India will be the “new” China in 2050 once they invest in their infrastructure and catch up.

@agree, infrastructure is very important yes, but it has no LONG TERM impact on employment in my own opinion, i.e. shovel-ready jobs. My main point though is that we need the infrastructure to support interstate commerce, and right now goods and services are not being produced/sold as we would like to see which is where real economic growth and jobs will come from. Thanks again for reading!